Stock vs. Bond Yields, and Demographic Fluctuations

This paper analyzes the strong comovement between real stock and nominal
bond yields at generational (low) frequencies. Life-cycle patterns in savings behavior in an overlapping generations model with cash-in-advance constraints explain this persistent comovement between financial yields. We argue that the slow-evolving time-series covariation due to changing population age structure accounts for the equilibrium relation between stock and bond markets. As a result, by exploiting the demographic information into distant future, the forecasting performance of evaluation models improves. Finally, using a cross-country panel, we document the cross-sectional variation of the demographic effect and explain the cross-country differences in comovement between stock and bond markets.